NOTE: This post is meant to be a beginner’s guide to Bitcoin’s impact on the environment, and some technical details and caveats have been omitted for brevity. This post is not intended to be investment advice.
Many of Bitcoin’s biggest misconceptions have persisted for way longer than they ever should have. Here are a few examples:
- Bitcoin is worthless because it isn’t backed by anything
- Bitcoin is perfect for criminals because it is anonymous and untraceable
- Bitcoin’s energy consumption is wasteful and out of control
Criticisms #1 and #2 have already been widely debunked:
The criticisms around Bitcoin’s “intrinsic value” and supposed untraceability are losing their power as more people become aware of the facts.
However, the facts around Criticism #3 — Bitcoin’s energy consumption — paint a bleak picture. Not only is Bitcoin’s energy consumption already large, it’s growing every day with no signs of slowing down anytime soon.
“” is an excuse, not a solution
A common counterpoint is that even though Bitcoin consumes a lot of energy, its overall environmental impact is still less than that of comparable industries like gold, physical currency, banking, credit cards, etc.
That kind of rationalization might help Bitcoin enthusiasts sleep better at night, but it doesn’t actually address the root problem, which is that Bitcoin’s energy consumption is already disproportionally large for the relatively small number of transactions and users that it handles today, and could become a major threat to the planet if Bitcoin ever becomes as widely used as incumbents like VISA.
If the Bitcoin community is serious about persuading its biggest critics and skeptics, mere is not enough. You can’t claim that Bitcoin will make the world a better place, while at the same time ignoring how it could do major damage in other ways to that very same world.
We need to be able to demonstrate four things:
- Bitcoin’s energy usage is reasonable, when viewed in proper context
- All that electricity is actually serving a useful purpose
- Bitcoin’s growing energy needs can be brought under control
- Over time, the electricity for Bitcoin will increasingly come from renewable sources
1) Viewing Bitcoin’s energy consumption in the proper context
Depending on who you ask and what assumptions they make in their calculations, Bitcoin’s annual electricity consumption is somewhere between 15 and 65 terawatt hours (TWh) per year, as of May 2018.
That sounds like a really big number, but it’s hard to know how big it really is without further context.
Bitcoin VS Countries
That is technically true, but it’s a flawed “apples to oranges” comparison because Bitcoin is not a country, nor is it limited to a single country — it’s a new global financial system that can be used by anyone, anywhere in the world.
If we’re going to use the world’s countries as a point of comparison, we should start with the fact that the world’s total electricity consumption is about 22,000 TWh per year, with China (6,300 TWh) and the United States (3,900 TWh) together making up almost half of the world’s total.
That means that Bitcoin (15 to 65 TWh) currently makes up between 0.07% and 0.30% of the world’s annual electricity consumption.
Bitcoin VS Power Plants
In other words, Bitcoin’s electricity consumption today (15 to 65 TWh) is comparable to the annual generation of a single large power plant.
Bitcoin VS Other Industries
Some people like to (favorably) compare Bitcoin’s energy consumption to that of industries like banking or gold, but I’m not a fan of that approach because the way Bitcoin uses energy is so fundamentally different.
For example, the global banking system consumes less electricity per transaction than Bitcoin, but it also employs millions of employees and maintains hundreds of thousands of bank branches and corporate offices that all require extra energy that is difficult to account for.
And gold is an even messier comparison. Despite its misleading name, Bitcoin “mining” is a purely digital activity, while gold mining is a physical activity that destroys landscapes and vital ecosystems, and releases toxic substances like cyanide and mercury into the environment.
Bitcoin VS Internet Data Centers
My favorite approach is comparing Bitcoin’s energy consumption to that of the world’s data centers, which are the backbone of the Internet and all the web-based services we use nowadays.
Bitcoin mining centers and internet data centers have a lot in common. They both require minimal human staff to operate, they both require a lot of electricity, and they even look similar — they’re both just endless racks of computer hardware:
In other words, Bitcoin’s global electricity consumption (15 to 65 TWh) is still less than that of data centers in the US alone, and is between 4% and 16% of data centers worldwide.
2) What is all that energy for, anyway?
Let’s say you agree that Bitcoin’s energy consumption is reasonable and not as bad as you thought, when viewed in the right context.
That may not be good enough for critics, who have been led to believe that Bitcoin’s only real purpose is to enrich greedy investors. To them, it’s a crime to “waste” so much electricity just so the rich can get richer. If you believe Bitcoin isn’t good for anything, then no amount of electricity would ever be acceptable — not 100 TWh per year, or 10 TWh, or even 1 TWh.
However, saying Bitcoin’s electricity consumption is “pointless” stems from a fundamental misunderstanding of what Bitcoin actually is, and the reason it uses all that electricity.
Bitcoin can make banking free and accessible for everyone
Simply put, Bitcoin is a new technology that allows anyone with an internet connection to freely and securely transfer money online to anyone anywhere in the world, without having to go through a bank or other financial institution.
If you’re new to Bitcoin, I’ve written previously about the new and exciting things made possible by Bitcoin’s core technology:
TL;DR — It’s easy to think Bitcoin is “pointless” if you live in a developing country and have easy access to bank accounts, credit cards, loans, and stock trading. However, 2 billion adults worldwide are still completely “unbanked” and don’t have access to any of those things. By creating secure digital money that is divorced from governments and corporate profit motives, Bitcoin could eventually do for banking what Wikipedia did for knowledge: make it free and universally accessible for anyone, anywhere.
That is pretty cool, but you might also be wondering how something like that is even possible, since money and currency have seemingly always been handled by banks and governments. How can a global payment network operate without any company or government running it?
Building a decentralized financial system from scratch
Normally, financial transactions are processed by banks and credit card companies using their own centralized servers and network infrastructure. These companies then pass these costs onto customers in the form of transaction fees, like the $50 it can cost to make an international wire transfer, or the 3% fee for processing credit card transactions.
A decentralized financial system would need to be able to do three things in order to build an infrastructure that is independent of banks and governments:
- Incentivize the owners of those computing resources to continuously contribute them to the Bitcoin network
- Make all this as easy and accessible as possible, so that anyone in the world with an internet connection and the right computer hardware can contribute.
Bitcoin’s “proof of work” system is a solution to these challenges.
It’s designed so that the more computing power you contribute to the network (to help it process transactions), the higher your chances of winning the 12.5 BTC “mining reward” that is generated with each 1 MB “block” of transactions which is mined every 10 minutes on average.
The 12.5 BTC mining reward is what incentivizes people to contribute computing power to the network, and it works like a lottery — winning is random, but the more “lottery tickets” you have (i.e. the more computing power you contribute), the higher your chances of winning.
As the price of Bitcoin rises, those 12.5 BTC become more valuable, which attracts more miners hoping to strike it rich. (Mining can be done by anyone with an internet connection and the right computer hardware.) More miners means more competition, which makes it increasingly difficult and energy-intensive to win each block’s mining reward.
This system of increasing difficulty and resource expenditure (i.e. the “work” in proof of work) is what makes Bitcoin so secure, even as Bitcoin’s price rises and becomes a high-profile target for hackers.
If a major corporation or national government wanted to disrupt or even shut down the Bitcoin network, they would have to expend a huge amount of computing power and electricity (and money, time, and effort) to do so — enough to power a large country for several years. As a result, to this day the Bitcoin blockchain has never been hacked.
So to answer the original question — “What is all that electricity for?” — it’s an investment in the ongoing security of a new global financial network with no single owner and no corporate profit motive, that no bank or government can exploit for their own power or enrichment. In other words, Bitcoin’s electricity consumption is, quite literally, the cost of true monetary freedom.
3) Scaling Bitcoin’s energy consumption
Let’s say you agree that the electricity expended to mine Bitcoin serves an important purpose, and could end up helping a lot of people.
Even so, what is most worrying to critics is the amount of electricity that Bitcoin mining consumes today per transaction, and how much that might increase as Bitcoin becomes more popular.
Believe it or not, Bitcoin already consumes more electricity than VISA’s and PayPal’s payment networks, despite handling much fewer transactions.
However, it’s important to remember that the Bitcoin is a very young technology compared to PayPal (1998) and VISA (1958), and there are good reasons to believe that it will become a lot more efficient as it matures.
Case Study: Data Centers in the US
This isn’t the first time that people have worried that a new internet-based technology will end up killing the planet. In fact, people were saying the same exact thing about the internet itself back in the 1990s and 2000s.
Back then, the criticism was directed at the booming demand for energy-hogging data centers, which were necessary to process and fulfill requests for the millions of new websites that were being loaded and clicked every second.
As a result, the electricity consumption of data centers in the US doubled from about 30 TWh per year in 2000 to nearly 60 TWh per year by 2005.
Had that growth rate continued, data centers in the US alone would have consumed almost 500 TWh per year by 2020 (more than all but 8 countries today), and more electricity than the entire United States uses today (3,900 TWh per year) by 2035.
But that’s not what happened.
Here’s what US data center electricity consumption actually looked like from 2000 until now:
After growing an average of 15% per year from 2000–2005, the average annual growth rate fell to a mere 1% per year from 2010–2014, and that trend is expected to continue through 2020, when it is projected to be 73 TWh.
73 TWh is a far cry from 500 TWh — what caused the growth rate to fall so dramatically between 2005 and 2010?
Long story short, data centers became a lot more energy-efficient, especially at the biggest tech companies like Google, Facebook, and Amazon, with their huge and highly-optimized “hyper-scale” data centers.
These innovations made it possible for the total electricity consumption from US data centers to remain almost constant, even as the demand for data center services has continued to grow rapidly. (All those YouTube cat videos have to be processed somewhere.)
“It’s like déjà vu all over again.”
Misguided extrapolations aside, in reality it’s much more likely that the growth of Bitcoin’s electricity consumption will tail off over time as mining becomes increasingly more optimized and energy-efficient.
That’s not to say that we should just sit around and wait for it to happen — we all have a role to play in making sure it happens as soon as possible.
Here are just a few ways the growth of Bitcoin’s electricity consumption can be tamed:
Unfortunately, all of these possibilities come with a lot of risk and uncertainty — more efficient hardware could actually lead to even more mining and electricity consumption by lowering the barriers to entry; no one can reliably predict or control Bitcoin’s price; and Bitcoin switching away from proof of work to another mining algorithm is still many years away, if it ever happens at all.
However, there is another new solution that is entirely within our control and would unambiguously be a game changer for the environment if it catches on.
The Dark Horse Scaling Solution
Bitcoin is only capable of processing a maximum of 7 transactions per second (tps), and in its current form would not be able to support the transaction volume of billions of users across the world.
The Lightning Network was designed to make it possible for Bitcoin to securely process hundreds, thousands, and even millions of times more transactions than it can today, allowing it to reach PayPal (240 tps) and VISA (1,700 tps) levels and beyond.
And best of all, those extra Bitcoin transactions wouldn’t require any additional electricity, because transactions that happen on the Lightning Network don’t require any additional mining.
A metaphor for how the Lightning Network works
Imagine you’re at a bar, and over the course of the night you end up buying one hundred drinks. You could pay for each of the hundred drinks individually, by pulling out your credit card each time and signing one hundred different receipts. But that would be very inconvenient and time-consuming for both you and the bartender. The same goes for paying in Bitcoin — each of those one hundred payments would have to be individually mined and processed, which would be a waste of time and an inexcusable waste of electricity.
Instead, most bars allow you to open a tab. When you order your first drink, the bartender asks for your credit card or ID — some form of collateral so you won’t leave without paying. Over the course of the night, every time you order another drink it’s added to your tab, and at the end of the night you “close” your tab by paying for your hundred drinks all at once, after which you get back your credit card or ID. Instead of having to pay for one hundred $5 drinks one at a time, with a bar tab you only have to pay $500 once.
That’s roughly similar to how you might pay someone via the Lightning Network. First, you would open what’s called a “payment channel” with the bar, and then post “collateral” in the form of an initial deposit transaction (let’s say, $700 worth of Bitcoin) on the blockchain to “open your tab”. After that, you can transact and buy as many drinks as you want on the Lightning Network. Once you’ve bought your one hundred drinks (costing $500) and are done for the night, you can “close your tab” by posting a second and final “settlement” transaction to the Bitcoin blockchain, in which the bar receives $500 in Bitcoin and you get back your remaining $200.
In the example above, only the opening and closing “on-chain” transactions require electricity, while the 100 “off-chain” Lightning Network transactions don’t require any extra electricity at all.
The Lightning Network aims to be the go-to place for smaller, lower-stakes transactions (e.g. buying coffee), while the energy-intensive Bitcoin blockchain would be reserved for larger transactions requiring maximum security (e.g. buying a house).
It’s worth nothing that the Lightning Network is still brand new and is just one of many possible solutions to Bitcoin’s scalability problem. While there is still a healthy amount of skepticism and doubt as to whether it will end up being the best solution, there is no doubting that it would drastically reduce Bitcoin’s energy needs if it becomes widely adopted.
4) Bitcoin will keep getting greener
Let’s say you agree that Bitcoin’s energy consumption growth could eventually be brought under control.
Even then, none of that matters if Bitcoin’s electricity consumption is coming primarily from non-renewable and “dirty” sources like Coal.
In a perfect world, all of Bitcoin’s energy consumption would come from only green, renewable sources.
Thankfully, a lot of Bitcoin mining already happens with renewable energy, and there’s good reason to believe that trend will only accelerate going forwards.
Economics of Bitcoin mining
Bitcoin mining is a for-profit business like any other, where profitability is determined by revenue minus costs. Mining revenue is determined by the difficulty level of mining and the exchange rate of Bitcoin when you win a block’s mining reward, and the two main costs of mining are electricity and specialized computer hardware.
The difficulty level and exchange rate of Bitcoin are out of miners’ control, and most serious miners use the same high-end hardware, which means the best way for miners to gain an edge over competitors and improve their margins is by finding the cheapest possible sources of electricity in the world.
Electricity prices can vary greatly from country to country (and even within a country), but as a general rule of thumb, “cheap electricity” is any energy source costing five cents ($0.05) per kWh or less.
Today, the cheapest sources of electricity in the world are generally Coal power, which is non-renewable and dirty, and Hydroelectric and Geothermal power, which are renewable and green(-er).
Solar and Wind power have historically been much more expensive, but their costs have been plummeting in the past decade (see below), and they are expected to become competitive with Fossil Fuels by as soon as 2020.
It’s possible we may see an increase in mining with Solar and Wind power in the next few years, but that is an eternity in “Bitcoin time”, and building new large-scale power plants is a multi-year process that can cost billions of dollars.
In the meantime, Bitcoin mining companies have been scrambling to seek out existing sources of cheap Coal, Hydroelectric, and Geothermal power across the world to satisfy their fast-growing energy appetites.
In addition to the local cost of electricity, other important factors that influence where Bitcoin miners set up operations include:
What’s more, Bitcoin mining centers are very mobile and can easily be dispatched and relocated to wherever has the most favorable conditions.
The Good News: Bitcoin miners are flocking to renewable energy sources
Hydroelectric power has emerged as the go-to energy source for Bitcoin mining in much of the world.
Not only is hydroelectric power very cheap, it’s also the most plentiful source of renewable electricity by far. 24.5% of the world’s electricity comes from renewable sources, and more than two-thirds of that comes from hydroelectric power.
Hydroelectric power is a superior energy source for Bitcoin mining for several reasons:
- Cheaper: Hydroelectric power is often cheaper than even non-renewable sources like Coal and Nuclear power
- Higher Capacity: Large-scale hydropower plants generally have the highest capacity of any energy source — more than Nuclear, Coal, Solar, Wind, and Geothermal power plants.
As the world continues to move away from Coal electricity, and as renewable energy sources like Solar and Wind continue to become cheaper and more widely available, Bitcoin mining should continue to become greener as well.
The Bad News: A lot of mining still happens with Coal electricity in China
More than half of the world’s Bitcoin mining takes place in China, and that is bad news for the environment.
We know that the mining centers in northern regions like Xinjiang, Inner Mongolia (aka “Neimonggu” below), and Heilongjian are powered by Coal electricity, while southern regions like Sichuan and Yunnan regions are powered by hydroelectricity.
The heavy concentration of coal-powered Bitcoin mining in China is highly concerning, but there are a few silver linings here.
First, China is not known for being very friendly to foreign businesses, which (thankfully) is an impediment to foreign miners looking to take advantage of China’s cheap Coal electricity.
We may reach a point in the future where “most Bitcoin mining happens in China” is actually great news for the environment, but until then we’ll have to hope that Chinese miners continue to leave China for cheaper, “greener” pastures abroad.
“With great (electric) power comes great responsibility”
Transformational new technologies are always a double-edged sword.
Its biggest supporters are passionate about the technology because they can see all the good it could do for the world.
However, even the best of intentions don’t absolve you of responsibility for the negative consequences that may arise from your work.
The future is not set. Twenty years from now, Bitcoin might be praised for ushering in an unprecedented era of financial freedom and inclusion, or it might be hated and blamed for causing massive and irreparable harm to our planet.
It all depends on us, and the choices we make — starting today.
Bitcoin is killing the planet: Fact or Fiction?